A cash-back rebate won by Margaret Thatcher from Britain's soaring
contributions to the European Union is under threat and would be cut by £5.6
billion under proposals made by Herman Van Rompuy.

In a secret paper, seen by The Daily Telegraph, the EU president has proposed cutting the annual refund, which is worth £3.2 billion a year, by 25 per cent during a seven year Brussels budgetary plan for 2014 to 2020.

The move would deprive the Treasury of £800 million a year at a time of deep cuts to Britain's public services and piles further pressure on David Cameron just one week before the Prime Minister faces his toughest battle at a Brussels summit that will determine the level of EU spending for seven years.

"The changes to the rebate would cost a significant amount of money. The lack of reform to the EU's budget means the rebate remains fully justified. We do not support any changes and have a veto," said a British diplomat.

Mr Van Rompuy's proposal would mean that Britain would no longer get a refund on rural development spending in the 12 EU countries that joined between 2004 and 2007, shaving around 10 per cent off the rebate. It would also mean that Britain would have contribute to its own refund, slashing another 14.7 per cent off.

"All corrections (the United Kingdom correction and the temporary lump sum corrections) will be fully financed by all member states based on the GNI key," according to the confidential negotiating paper.

The rebate was won for Britain by Baroness Thatcher at an EU budget summit in Fontainebleu in 1984 after she famously "hand-bagged" French and German leaders by vowing "not a penny more" for Brussels.

The refund was given because Britain receives disproportionately less in Brussels farm subsidies than French farmers, a situation that has persisted over 30 years by the EU's failure to modernise its budget.

Next week, Mr Cameron will confront a similar test to Baroness Thatcher after the political temperature at Westminster has risen following a House of Commons defeat for the government over the Brussels demands for steep increases to EU budgets at a time of national austerity.

Under Mr Van Rompuy's plan, Britain would also be "committed" to potential annual contributions to the Brussels budget of £14 billion a year, representing a bill an EU membership bill of over £900 a year for every British household.

While his figure of £784 billion is less than the "commitments" level for 200 to 2013 EU spending, is nowhere near the cuts to the ceiling of actual cash payments that Britain is seeking.

The new spending blueprint from Mr Van Rompuy, who chairs the European Council, the summits of EU leaders, is aimed at isolating Britain from Germany ahead of a major battle next week.

He is hoping that his proposed cut of £60 billion to the European Commission's original proposal will peel Angela Merkel away from supporting Mr Cameron's opposition to budget increases.

The level of reductions proposed by Mr Van Rompuy is less than half the level the Prime Minister must win at the summit next Thursday if he is not to suffer a defeat in a Commons vote.

Vincenzo Scarpetta, of the Open Europe think-tank, said the EU president's proposal would do nothing to avert Mr Cameron's threat of using his veto to block a decision on the spending plan.

"Although Van Rompuyﾒs proposal represents a cut and an improvement compared to the commission proposal, a cut to the UK rebate has been snuck in, meaning that the UK's net contribution to the EU budget would go up disproportionally," he said.

"Therefore despite the proposal representing a compromise, this could still make it unacceptable to the UK government from the outset, meaning a potential UK veto is still hanging in the air."